World Economic Forum Experts See Great Potential in Emerging Markets
By Saul Howerton, VP, Advisory
The World Economic Forum held its annual meeting last week in Davos, Switzerland. One of the persistent themes of the event was the importance of emerging markets. Reports and presentations advanced both a business and a moral imperative for investing in these up-and-coming economies.
Expanding into emerging markets can certainly offer rewards, and research suggests potential benefits may increase substantially in the coming decades. But investing in developing countries requires strong reserves of flexibility, patience and creative thinking. Here are some of the advantages and challenges of emerging markets, as laid out at Davos and elsewhere.
By 2050, the global economic order will be drastically different from today’s, an article from the forum predicts, with China in the number-one spot, followed by India, the US and Indonesia. Brazil will be in fifth place, followed by Russia, Mexico and Japan.
The article is based on a PwC report predicting that the world economy will double by 2042, with emerging markets growing twice as fast as advanced economies. One reason is that the world’s young economies also have youthful and fast-growing populations, which will boost both domestic demand and the size of their workforces. In advanced economies, by contrast, working-age populations are declining.
As developing economies progress, their citizens will become richer, though still not as rich as those in advanced economies, and opportunities to partner with and sell to them will increase.
Ignore them at your peril, the report suggests: “Failure to engage with these markets means missing out on the bulk of the economic growth we expect to see in the world economy between now and 2050.”
The path to prosperity will not be even. Growth is likely to be accompanied by large economic and political swings as countries develop the financial and social infrastructure needed to compete alongside the world’s more established economies. While World Bank studies show that doing business in the developing world is becoming easier, many nations still need to strengthen their institutions and improve the health and education of their populations, as well as their technology, to achieve their full potential.
Doing Well by Doing Good
Nonprofits and Western companies can use their advanced technology and resources to help. Companies could reap substantial benefits as countries become stronger trading partners.
One forum article cites the example of Living Goods, a nonprofit that recruits women in Uganda and Kenya to provide health education and distribute medicine to families, helping them fight malaria, diarrhea and pneumonia. The women use a cell phone app based on Western technology to diagnose illnesses, provide treatment and follow up.
In India, Western technology helped a local internet company develop into one of the largest mobile networks in the world, creating a new universe of customers for internet commerce.
Access to the internet also brings a thirst for knowledge that can lead to cultural change. A forum report on food traceability, developed with McKinsey, cites research by Nielsen that shows concern about ingredients is not restricted to picky Western eaters. Over 70 percent of consumers in Asia Pacific, Africa, the Middle East and Latin America “want to know everything that is going into their food,” the research found.
In many countries, however, information about food sources is lacking, and labeling may be fraudulent. Western blockchain technology could help solve this problem by creating an indelible record of ingredients as they move from farm to table, the McKinsey report said.
Contamination is another problem. Over 600 million people — one in ten worldwide — die each year from contaminated food, many of them in Africa and Southeast Asia, according to the World Health Organization. Internet-of-Things (IoT) food sensors could help uncover the sources of contamination, helping producers resolve problems. They could also save food companies money by allowing them to remove from shelves only those products affected by the source of contamination, rather than the entire supply.
Adapting to the Environment
Pairing Western technology with Eastern population growth can be a winning combination. Another forum report suggests that some of the greatest opportunities will be in India, where internet-fueled domestic consumption is expected to skyrocket. As households boost their income, they will spend more than twice as much as they do today on essential care items and three to four times more on entertainment, services and wellbeing, the report says.
But taking advantage of this opportunity — even in a country where many speak English — is not as simple as it may sound. Amazon's experience illustrates the challenges companies can expect to face in a developing country.
The company predicts online shopping will triple, with most new demand coming from rural customers. Some don’t speak English, and most rely on inexpensive cell phones with poor network connections for internet shopping. They read poorly, if at all, and watch videos to learn about products.
As it encountered these hurdles, Amazon modified its app to work with patchy cellular networks, added videos and product descriptions in Indian languages, opened physical stores where it could explain how online shopping works, and recruited locals to distribute products, sometimes by boat or bicycle. The company also allows customers without bank accounts to pay with cash.
Other companies have developed or are working on digital payments, including Paytm, which allows merchants and customers without bank accounts to pay by phone. Warren Buffet’s Berkshire Hathaway recently took a stake in the company, its first venture in India.
Western companies have many opportunities to help emerging countries improve their education, health and financial and technological infrastructure, and in the process, develop new markets. The endeavor will require patience and resourcefulness, but it could bring great rewards over time. As developing countries build a stronger foundation, they will become even more desirable targets for future foreign partnerships.